GOLD,

SILVER ,
S TA B I L I T Y
TA RY
AN D MONE

An almost-forgotten 19th century episode

shows that international cooperation is
essential for a stable global monetary system
Johannes Wiegand

T
he year 1873 marks a turning point in the government resumed specie (coin) payments
monetary history. In July, the new German (which happened in 1879).
Empire Reichstag replaced an array of With the United Kingdom already on gold, by
silver-based currencies with the gold mark. the end of the 1870s all the world’s leading indus-
In September, the Paris mint limited silver coinage, trial nations used gold currencies. Silver—which,
ending the double gold-silver monetary standard until 1873, had been on an equal footing with
France had maintained for decades. And earlier gold—became a secondary currency metal used
that year, the US Congress legislated the phasing mostly by periphery countries.
out of the temporary paper currency of the Civil The monetary impact was stark. Between 1873
War years, to replace it with a gold dollar once and the end of the decade, silver depreciated by

54 FINANCE & DEVELOPMENT | March 2023

some 20 percent relative to gold, after having
traded at stable exchange values for 70 years. Gresham’s law
Gold countries experienced severe deflation that “Gresham’s law” states that, in fixed exchange rate systems, “bad money drives out
lasted until the early 1890s. The real reper- good.” In the case of bimetallism, it worked as follows: the mint fixed the relative price
cussions are more difficult to assess because of two currency metals. If the supply of one metal increased—for example, because
comprehensive national accounts for the 1870s of new discoveries or currency reforms that demonetized that metal—its market price
are lacking, but indicators such as industrial would tend to fall, generating an incentive to bring bullion (raw metal) to the mint and
production point to a severe and long recession in convert it into specie (coins) to take advantage of the price guarantee. Conversely, the
several countries—in Germany, for example, the other, now scarcer (and therefore relatively more valuable), metal would be withdrawn
post-1873 years are known as the Gründerkrise from circulation. Changes in bullion supply therefore shifted the composition of specie in
(a period of crisis). favor of the cheaper, “inflationary” currency metal, as long as the mint’s price guarantee
was effective. This monetary principle is named for Sir Thomas Gresham, financial agent
Global bimetallism of Queen Elizabeth I.
Nineteenth century currency systems operated
very differently from today’s monetary system.
Money was tied to precious metals (bullion). gold crowded out silver entirely from French specie,
Coins (specie) were minted from bullion, and France would become a de facto gold country. The
paper money could be exchanged for bullion at bond between gold and silver currencies would
guaranteed exchange values. break, and the world would split into gold and silver
In the early 19th century, most countries tied blocs, triggering potentially violent movements in
their currencies to silver—except the UK and, exchange rates and prices.
beginning in the mid-1830s, the US, which were Concerns ran especially high in Germany. Most
on gold. France tied its currency to both gold and German states used silver currencies. Without the
silver: per an 1803 Napoleonic law, the French mint bimetallic bond, Germany would find itself on a
paid 200 francs for a kilo of silver and 3,100 francs different monetary regime than the world’s lead-
for a kilo of gold. France’s double price guarantee ing economies—the UK, the US, and France—
established global bimetallism: it ensured not only and would trade with them on floating exchange
a stable exchange value of 15½ between silver and rates. Economists and businesses feared this would
gold but also quasi-fixed exchange rates between demote Germany to a periphery economy. And not
all countries on gold and silver currencies. everyone in France was happy with bimetallism
Global bimetallism worked as long as both either, especially with the fluctuations in specie
gold and silver coins circulated in France. France composition that France had to endure.
would then operate as a global monetary stabi-
lizer: through a mechanism called Gresham’s law, Bimetallism in the 1860s
changes in the global quantities of gold and silver Given these strains, how did bimetallism survive
translated primarily into changes in France’s cur- the 1860s? In 1867, Emperor Napoleon III hosted
rency composition, while exchange rates between an international monetary conference in Paris to
gold and silver currencies remained stable. seek alternatives. It issued a nonbinding recom-
Moreover, bimetallism was better at stabilizing mendation for a global currency system based on
prices than a regime based on only one currency gold. France itself seemed to be leading the world
metal, as supply shocks to gold and silver partially away from bimetallism.
offset one another. Making a recommendation was one thing; how-
Global bimetallism operated seamlessly until ever, implementing it was another—not least for
about 1850. Then, large gold discoveries in France itself. Moving to gold required getting rid
California and Australia increased global gold of France’s silver coins. But silver would devalue
production by a factor of 5. Per Gresham’s law, the once the bimetallic bond was dissolved and silver
share of gold in French specie surged—from less demonetized—by abandoning bimetallism, France
ART: ISTOCK / BRAINMASTER

than 30 percent around 1850 to more than 85 (!) would impose a loss on itself (Flandreau 1996).
percent in the mid-1860s. In Germany, a growing sea of voices demanded
It gradually dawned on currency experts that this replacement of silver with gold or a bimetallic cur-
was a dangerous development for bimetallism. If rency. But the German states could shed silver coins

March 2023 | FINANCE & DEVELOPMENT 55

 of French GDP), which was payable in silver, among
Silver and gold other things. France could not abandon bimetallism
Per Gresham’s law, changes in gold and silver supply affected France’s currency now, as demonetizing silver would undermine its
composition, while exchange rates between gold and silver currency remained stable. capacity to pay and regain sovereignty.
Annual global gold and silver production Share of gold coins in France's specie circulation This meant policymakers in Berlin had free
(millions of French francs) (percent) rein to pursue currency reform—but only until
1,000 100
France settled the indemnity. Hence Germany
acted quickly, even hastily. In July 1871, the
800 80
Berlin mint suspended silver coinage. A few weeks
Gold
later, the federal government began buying gold
600 60 in London, and in early December, the Reichstag
passed a law authorizing gold coinage. The fed-
400 40 eral and regional governments brought the new
Silver gold coins into circulation simply by spending
200 20 the indemnity (without withdrawing silver coins
first). Hence specie circulation surged, unleashing
0 0 a large (and short-lived) fiscal-monetary stimulus.
1850 1855 1860 1865 1870 1875 1850 1855 1860 1865 1870 1875 The Reichstag formally adopted the gold standard
Source: Wiegand (2019). in July 1873.
One may wonder why Germany adopted a gold
and not a bimetallic currency—prior to 1870,
only if someone exchanged them for gold—and in bimetallism had enjoyed considerable support
the bimetallic system, this “someone” could only among German economists. But Germany’s specie
be France. According to Gresham’s law, German circulation was too small to sustain global bimetal-
reform would trigger a large increase in French lism on its own: it needed France to maintain the
silver circulation. Would France tolerate this? Or bimetallic bond, both before and after settling the
would it cut the bimetallic bond to avoid getting indemnity—otherwise Germany would be thrown
swamped with silver—and bring about the very back on silver. Monetary cooperation had already
outcome German pundits feared: monetary iso- failed in the 1860s; however, it seemed even less
lation? German policymakers were left guessing probable in the aftermath of armed conflict.
and did not advance currency reform beyond pre- Hence Germany moved all the way to gold: it
liminary steps (Wiegand 2022). was the only choice that avoided monetary isolation
In short, in the 1860s there was no easy way regardless of France’s decisions (Wiegand 2019).
out of bimetallism. France both controlled and And Germany was not alone: the Scandinavian
was hostage to the bimetallic system: it could countries and the Netherlands also used the window
deter other countries from changing the system’s of opportunity to switch from silver to gold.
parameters, but it could not end bimetallism itself
without incurring significant costs. Hence bimetal- Breaking bimetallism
lism prevailed. Markets placed remarkable trust in On September 5, 1873, France settled the indem-
the arrangement and treated gold- and silver-based nity’s last installment—two bond issuances of
assets as near-perfect substitutes (Flandreau and hitherto unknown volume (the Rente Thiers)
Oosterlinck 2012). had allowed much earlier payment than origi-
nally anticipated. The next day the Paris mint
Germany’s reform limited silver coinage, and therefore broke the
The setting changed fundamentally in 1870. bimetallic bond.
A Prussia-led German coalition won the This move was unexpected. France could have
Franco-Prussian war, triggering Napoleon III’s sustained bimetallism even after the German,
downfall, the emergence of the Third Republic, Dutch, and Scandinavian currency reforms if it
and the formation of the German Empire. Prussian had accepted a higher share of silver coins. Why
troops occupied Paris and would withdraw only once then expose itself and the world to monetary insta-
France paid a large indemnity (more than 20 percent bility? The measure appears so self-destructive that

56 FINANCE & DEVELOPMENT | March 2023

Flandreau (1996) suspected revanchism as the region found a rock that contained traces of gold.
motive. Ending bimetallism harmed France—but It turned out to be part of an enormous gold
it harmed Germany even more, as Germany sat deposit. The ensuing gold boom dwarfed even
on an even larger pile of silver that could now be the earlier Australia and California gold discover-
sold only at a loss. ies. The gold fed into the money supply, allowing
An intriguing interpretation has been pro- liquidity-strapped economies to reflate rapidly. As
posed by Velde (2002). France could have upheld deflation came to an end, debt concerns weighed
bimetallism in the early 1870s—but its absorptive less heavily.
capacity was not unlimited. Beginning in the The belle epoque began, a period of rapid eco-
early 1870s, discoveries in America’s West boosted nomic, technological, and cultural development
global silver production (see chart)—and accord- that lasted until World War I. Prosperity boosted
ing to Gresham’s law, this silver would eventually the gold standard’s reputation: tying a currency to
find its way into French specie, crowding out gold became synonymous with sound monetary
gold. And what if even more countries abandoned management. Hence, after World War I, policy-
silver currencies and sought to unload obsolete makers sought to restore the gold standard—tying
silver on France? the “golden fetters” that would later amplify the
The tide had turned: it was now France that had Great Depression.
to fear monetary isolation on silver should bimet-
allism end. Faced with this prospect, pulling the Lessons
plug early while France’s silver holdings were still Bimetallism operated smoothly as long as the
small—and Germany’s large—seemed better than financial environment was stable and only one
waiting and ending up with a large silver pile for country—France—needed to sustain it. When
which the rest of the advanced world had no use. the going got tougher, maintaining bimetallism
Consistent with Velde’s interpretation, France would have been beneficial, but it would have
did not end bimetallism abruptly. Instead, the required international cooperation—and coop-
Treasury stressed that limits on silver coinage were eration failed miserably.
temporary and could be lifted once excessive silver While today’s monetary system operates very
inflows stopped: a weakly concealed invitation differently from that of the 19th century, mon-
to Germany to reconsider its reform. Only when etary stability remains a global public good,
these efforts failed did bimetallism’s demise become which requires international cooperation.
irreversible. In early 1875, markets concluded that Monetary stability shares this basic feature with
the bimetallic bond was gone, and in 1876, France all global public goods, from securing peace and
suspended silver coinage entirely. The classic gold stability to safeguarding the world’s climate.
standard was born.
JOHANNES WIEGAND is an advisor in the IMF’s Strategy,
Aftermath Policy, and Review Department.
It is almost forgotten that the gold standard’s early
years were rough. In the new gold bloc, persistent References:
deflation drove up real interest rates that weighed Flandreau, Marc. 1996. “The French Crime of 1873: An Essay on the Emergence of the
on profits and investment. Distributional conflicts International Gold Standard, 1870–1880.” Journal of Economic History 56 (4): 862–97.
between debtors and creditors erupted and poi- Flandreau, Marc, and Kim Oosterlinck. 2012. “Was the Emergence of the International
soned the political atmosphere. It soon dawned on Gold Standard Expected? Evidence from Indian Government Securities.” Journal of
the public that the monetary decisions of the early Monetary Economics 59 (7): 649–69.
1870s had something to do with this. Bimetallic Velde, François R. 2002. “Following the Yellow Brick Road: How the United States
Adopted the Gold Standard.” Federal Reserve Bank of Chicago Economic Perspectives 26
lobby groups formed and demanded the resur-
(2): 42–58.
rection of the old monetary regime. International
Wiegand, Johannes. 2019. “Destabilizing the Global Monetary System: Germany’s
conferences in 1878, 1881, and 1892 discussed Adoption of the Gold Standard in the Early 1870s.” IMF Working Paper 19/32,
the issue, but as in the 1860s, they failed to come International Monetary Fund, Washington, DC.
up with results. Wiegand, Johannes. 2022. “Pictures of a Revolution: Analyzing the Transition from Global
Another inflection point arrived in July 1886, Bimetallism to the Gold Standard in the 1860s and 1870s.” IMF Working Paper 22/119,
when a prospector in South Africa’s Witwatersrand International Monetary Fund, Washington, DC.

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